Is Defeasance the Right Exit Strategy for You?
Northmarq, a full-service capital markets resource for commercial real estate investors, can help you decide whether defeasance is the best strategic investment solution for you. If it is, we can recommend the ideal time to seek an agreement and guide you through complex negotiations and transactions. We also handle the defeasance process on your behalf, allowing you to focus on your new loan or property sale.
Northmarq provides a full range of defeasance services, including:
- Setting up custodial accounts that hold securities for the remaining term of your loan
- Assembling the most cost-effective securities portfolio through a securities trader
- Notifying the Servicer on your behalf
- Ensuring defeasance is ready to close at the same time as your asset's sale or refinance
- Working with the successor borrower and other parties to meet the closing time frame
- Ordering the accountant verification report
- Exploring residual sharing opportunities
- Closing this complicated financial and legal transaction
Want to learn whether defeasance is right for you? Contact our experts at defease@northmarq.com or download our defeasance services flyer.
FAQs About Defeasance
Here are answers to some commonly asked questions about defeasance so you can understand this complex process and when it's the right solution for you.
What is defeasance, and how does it work?
Defeasance is a collateral substitution option that can release borrowers from their loan obligations if they purchase a U.S. government or agency securities portfolio. This portfolio provides replacement collateral to secure the loan and is structured so that the cash flow generated by the securities will make all the remaining monthly payments going forward including the balloon payment.
Defeasance is not a payoff. The Note remains in place, but through this process, the property is released from the lien and the borrower is released from the loan obligations going forward.
How do I know if my loan requires defeasance?
A borrower might require defeasance on a securitized loan in lieu of a maintenance prepayment premium. If defeasance is an option or requirement, you can normally find this clause in the Loan Agreement. Other times, the security instrument (mortgage or deed of trust) or the Note might contain defeasance contractual language.
How long does the defeasance process take?
Defeasance usually takes around 30 days, although some cases can be completed in as little as a week. The process involves several parties, including an accountant, a loan servicer, attorneys, and possibly rating agencies.
The defeasance will start when the Defeasance Notice and the required deposit ($25,000 - $45,000) is delivered to the Servicer. Servicer's Counsel will then issue a checklist that must be completed prior to closing. Quickly providing the deliverables to Servicer's Counsel can speed up closing time.
It's a good idea to provide the Servicer with at least 30 days’ notice for completing the defeasance process. Doing so can avoid any expediting fees charged by the Servicer. If defeasance requires rating agency approval, 45 days' notice is recommended.
Can I defease to the date the loan can be prepaid at par (open date) rather than the maturity date?
It depends. Usually, the contractual language in a loan document requires a borrower to purchase defeasance securities to the maturity date. However, some Servicers interpret this language differently and allow defeasing to the open date in specific situations.
Do I have to defease on a payment date?
Typically, loan documents stipulate that a borrower has to defease on a payment date. However, Servicers always waive this requirement. The Servicer will continue to receive all the required monthly payments including the balloon payment, so it does not matter to the Lender what day of the month the defeasance closes. Once you start the defeasance process, the closing date is flexible.
What is the defeasance residual, and can the residual be shared with the client?
Securities purchased throughout the term of a loan might mature before monthly loan payments are due, resulting in residual cash in a custodial account. Interest earned on this cash can also accumulate in the account, though it's typically a small amount.
In other situations, the successor borrower can prepay their loan on the open date, usually one to six months before maturity. Once the payoff is complete, the remaining securities purchased up to the maturity date will be sold off, and proceeds from the sale of the remaining securities may exceed the payoff amount. That leaves a residual at the end of the loan term.
A defeasance residual can be shared with the client if a substantial amount of cash is left over at the end of the loan. However, the client's loan documents will determine the specific rules for residual sharing.
Why Choose Northmarq as Your Defeasance Consultant?
Northmarq simplifies the defeasance process in various ways. By providing mortgage banking and investment sales services, Northmarq can be your one stop shop for defeasance services as well. This can help ensure a more seamless and efficient process. Our full-service model allows us to keep overhead costs down and charge lower defeasance consulting fees than our competitors.
As your defeasance consultant, we will manage the entire process from start to finish, including notifying the loan Servicer on your behalf and coordinating with the Servicer's Counsel. Our goal is to make defeasance as smooth as possible and ensure you meet the closing time frame.
So, how do you get started? Simply email us for a cost estimate, and then complete these three tasks:
- Sign the Northmarq defeasance services engagement letter.
- Sign the letter that notifies the Servicer of the defeasance. (We'll draft this letter and deliver it to the Servicer.)
- Wire the defeasance deposit required by the Servicer — typically between $25,000 and $45,000.
Is the defeasance deposit refundable?
The defeasance deposit is a condition of the loan Servicer and is refundable at their discretion. Unfortunately, we have no say in whether the Servicer will return the deposit if the defeasance doesn't close. The borrower should be confident that the sale or refinance will close before sending a deposit to the Servicer.
Is there a fee for a defeasance cost estimate?
Northmarq offers free defeasance cost estimates. Just provide us with the loan documents that contain defeasance language, and we'll determine the factors that might impact costs, such as whether you can defease your loan to the open date instead of the maturity date. We'll give you a general cost estimate if you don't have these documents.
Download our defeasance services flyer to learn more.